Chairman’s statement

First furnace at Sakura Ferroalloys in production, second commissioned

Dividends for the year increased to R7,00 per share

Strong cash position maintained

Prices for the group’s products recovered during the second half of the financial year. However, global economic conditions remain challenging, with continued oversupply in the group’s markets. Despite these dynamics, record sales volumes of iron and chrome ores were achieved by the group for the second year in a row. The level of profitability in the second half has recovered to levels similar to those achieved during the previous financial year.

The year under review

The past financial year has yielded higher earnings than originally anticipated. This was particularly evident in the second half of the year, with prices for iron and manganese ores making a sustained recovery since January. Average prices for iron ore for the second half were approximately 3% higher than the first half, while those for manganese ore were 18% higher. However, in rand terms, prices for chrome ore were 13% lower in this period.

In addition to the improved prices for iron ore, the premium for “lumpy” grade iron ore in the second half of the year was approximately US$4 higher per tonne than in the first half. While the gains in the prices of iron and manganese ores noted above appear to be modest, the group benefited from improved production at its mines and higher railings in the second half, which led to record sales volumes being achieved for iron and chrome ores for 2016. This, coupled with a weaker rand/US dollar exchange rate, which was approximately 12% weaker during the second half at R/US$15,38, gave rise to more favourable trading conditions compared with the first half of the year. These factors resulted in a recovery of profitability, giving rise to headline earnings for the year of R1,7 billion, compared with R2,0 billion in 2015, with just over R1,0 billion of these headline earnings recorded in the second half of the financial year. The contributions to headline earnings by the divisions of Assmang (Iron Ore, Manganese and Chrome) and the other business conducted by the group over the past five years are illustrated in Figure 1.

Market conditions

The main factors during the previous financial year which gave rise to depressed commodity prices, remained evident during the first half of this financial year. Firstly, additional volumes of both iron and manganese ores entered the market, with little tonnage being removed from the market. Secondly, world crude steel production declined by 2% in the 2015 calendar year, and this trend is expected to continue in this calendar year. Chinese crude steel production for this year has, however, remained at a similar level to that achieved in 2015, with excess production being exported, placing pressure on steel prices and consequently on prices of the group’s base mineral products. The market for manganese alloys remained in oversupply, despite the closure of more than 3 million tonnes of worldwide capacity per annum.

The group has benefited from the application of tighter environmental controls being imposed in China, which has increased the demand and pricing for the higher-grade products which the group produces. In addition, the Chinese government launched economic stimulus measures, creating temporary pricing gains for the group’s products. With low inventory levels of chrome ore in China not being met with sufficiently decreased levels of stainless steel production, prices for chrome ore increased sharply towards the end of the financial year. A stagnant freight market kept freight rates low throughout the year, largely as a result of low crude oil prices, and this provided the group with opportunities to optimise net landed prices for its customers.

Expansion and capital expenditure

The acquisition of Dwarsrivier Chrome Mine (Dwarsrivier) was concluded on 29 July 2016 and is expected to improve the balance in the group’s product risk. Initial improvements in productivity have already been implemented and the mine is planning to produce approximately 1,3 million tonnes of saleable ore in the forthcoming year, which is 13% more than the sales volumes recorded for 2016. Sakura Ferroalloys, in which Assmang holds a 54,36% interest, has successfully commissioned its two recently constructed ferromanganese furnaces, within the original budget of US$328 million. The second furnace achieved first production of alloy in September and it is expected that it will be converted from high-carbon ferromanganese to silico manganese in the first quarter of 2017.

Several initiatives are currently under way in IronRidge Resources Limited (IronRidge), an AIM (London) – listed exploration company in which the group holds a 29,9% equity interest. Satisfactory progress has been made in prospecting for iron ore in Gabon, while recent developments include assessing bauxite, lithium and gold deposits in Australia, Ghana and Chad respectively.

The most significant feature in Assmang’s capital expenditure, which amounted to R3,0 billion for the year (2015: R3,8 billion), is the expansion project at its Black Rock Manganese Mines, on which R1,7 billion was spent (2015: R1,3 billion). R383 million was spent on waste-stripping at its iron ore mines, with remainder of the expenditure on replacement items. The allocation of capital expenditure over the past five years across the divisions of Assmang is set out in Figure 2.

Dividends

Despite difficult trading conditions, the group has managed to retain cash within the business, and capital projects remain funded from these reserves. Accordingly, with the improved level of earnings in the second half of the year, the final dividend was increased from R3,00 per share to R5,00 per share, making the total dividend for the year R7,00 (2015: R6,00) per share.

Outlook

The better than expected level of Chinese steel production in recent months is encouraging. However, the supply of iron ore worldwide has increased, causing price levels to remain under pressure. The impact of prospective interest rate increases in the United States of America remains unclear, while conditions in the Chinese economy, which have been the driver of increased demand for commodities over the recent past, remains relatively weak and the continued economic impact of the stimulus measures introduced by its government is also in doubt. The result of these and other global factors has a major impact on the level of certainty required for additional steelproducing capacity, with world economic growth expected to be 2,9% for 2016 with a projected increase to 3,4% in 2017.

Prices for the group’s products have increased over the levels achieved in the first half of the year, which has encouraged additional sales volumes of ores, particularly for the lower grades. Although the group is favourably placed in terms of its ratios of production of higher grade ores, pricing pressure is expected to remain a feature of the markets for the medium term. In the near term, prices for iron ore are expected to remain under pressure, with additional capacity entering the market from Australia and Brazil as well as certain high-cost producers re-entering the market following improved sales prices for ore. For manganese and chrome ores, prices have improved markedly, with current published prices for manganese ore approximately 50% higher than the average prices achieved in the second half of the financial year. Drivers behind these higher prices include inventory shortages and environmental controls, which favour the use of highgrade products by steel producers. Additional upward pressure on manganese ore prices has arisen as a result of logistical concerns at the export facilities for manganese in Port Elizabeth.

Appreciation

Taking into account the uncertainties pervading the mining industry both locally and overseas, this year has been a successful year for the group, with the acquisition of Dwarsrivier and the commissioning of the low-cost producing manganese alloy furnaces in Malaysia. I thank my fellow directors, the management and staff for their ongoing support and commitment during the year. Additionally, I remain very appreciative of the roles played by our customers, agents, suppliers and bankers who continue to contribute greatly to the group’s achievements.